Search in:

State governments face $40b blowout in super deficit

Eric Johnston

THE unfunded pension liabilities of Australia's six state governments have blown out by $40 billion to more than $140 billion over the past year, increasing pressure on some to inject funds into the schemes.

The blowout for schemes that cover retirement savings for police, teachers and healthcare workers, comes as many states are already battling softer than expected tax revenue mostly due to sluggish property markets and to payroll taxes falling on weaker job markets.

But the shortfall has increased over the past year due to a dramatic collapse in Commonwealth government bond yields, which means the assets in the state-backed pension schemes are now forecast to earn a fraction of previous estimates.

State-backed pension programs typically invest in fixed-income assets such as government bonds and cash. But this means the scheme underwriter - in this case the state governments - are often left to cover the difference when investment returns fall short. Although with the long-term nature of the liabilities - with some payments still decades out - credit ratings agencies and financial markets generally look through the deficits sitting on state balance sheets.

Advertisement

At nearly $51 billion, New South Wales has the biggest absolute pension liability, up from $34 billion a year ago. The shortfall represents 11 per cent of the state's economy.

The NSW government recently noted that expected investment returns by State Super, which oversees the state's superannuation scheme, were tracking ''below long-term average'', at about 3 per cent.

''In the current uncertain global environment, AAA-rated Commonwealth government bonds are seen as a safe haven for international investors. As a result, yields have fallen to very low levels by historical standards,'' NSW Treasury noted in its annual review. Indeed, over the past year long-term Australian government bonds have fallen to a low of just 2.8 per cent. On Friday they were trading at the equivalent of 3.4 per cent.

Meanwhile, Victoria's pension scheme - which covers payments for emergency services staff - has blown out to $32.7 billion, or 10 per cent of state output. This is up sharply from $22.8 billion a year earlier.

Queensland's $31 billion in obligations is running at 11 per cent of state output and is up from $25.1 billion. And Western Australia's $8.6 billion deficit was up from only $7 billion last year.

South Australia's $13.5 billion is running at nearly 15 per cent of the state's economy. This prompted the state's Weatherill government to inject $409 million into the fund during the 2012 financial year.

The drop in bond yields is also causing headaches for some of the nation's biggest companies, with the deficit across in-house pension schemes for many blowing out by hundreds of millions of dollars.

Commonwealth Bank for one saw its deficit lift to $3.71 billion from $3.49 billion a year earlier. Qantas saw its unfunded pension obligations jump to $479 million from $173 million, while BHP Billiton had tens of millions added to its scheme.

While corporate Australia generally phased out defined benefit plans during the 1990s, many are carrying billions in obligations.